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Delays to product approvals and a protest by a competitor have led to the anticipated incremental revenue in FY21 from body armour contracts signed in FY20 being deferred to FY22. As a result, our FY21 revenue estimates are reduced by $50m, dropping through to a reduction in FY21 EPS of 19%. We expect the contracts to deliver as previously expected in FY22. The rest of Avon Rubber continues to trade as anticipated and has experienced good order intake during Q121. FY22 is currently unchanged and Avon continues to grow strongly as it executes its growth strategy.
Written by
Avon Rubber |
Body Armor ramp up deferred to FY22 |
Body armour contract delays |
Aerospace & defence |
17 December 2020 |
Share price performance
Business description
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Avon Rubber is a research client of Edison Investment Research Limited |
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Delays to product approvals and a protest by a competitor have led to the anticipated incremental revenue in FY21 from body armour contracts signed in FY20 being deferred to FY22. As a result, our FY21 revenue estimates are reduced by $50m, dropping through to a reduction in FY21 EPS of 19%. We expect the contracts to deliver as previously expected in FY22. The rest of Avon Rubber continues to trade as anticipated and has experienced good order intake during Q121. FY22 is currently unchanged and Avon continues to grow strongly as it executes its growth strategy.
Year end |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/19 |
162.0 |
28.3 |
84.9 |
26.6 |
52.4 |
0.6 |
09/20 |
213.6 |
36.0 |
96.2 |
34.5 |
46.3 |
0.8 |
09/21e |
284.9 |
50.2 |
130.9 |
44.9 |
34.0 |
1.0 |
09/22e |
362.0 |
69.4 |
181.1 |
53.9 |
24.6 |
1.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. Avon moves to reporting in US$ in FY21, FY19/FY20 restated accordingly.
Delays to US DOD contracts
Avon has announced that due to product approval delays for its DLA ESAPI (US Defense Logistics Agency Enhanced Small Arms Protective Inserts) and the US Army VTP (Vital Torso Protection) body armour contracts, deliveries are not expected to commence until H122 (mid-FY21 previously). The issues are caused by failure of the product while testing initial production samples; these are expected by management to be resolved but with a resultant delay. In addition, a competitor has protested the US Army’s Next-Generation IHPS (Integrated Head Protection System) sole-source contract award announced on 24 September, which is not material for FY21 but may at least cause a delay of several months. It is plausible that the award will be maintained but this is not certain.
Other expectations maintained
More positively, a separate announcement confirms initial orders under the NATO mask contract under this 10-year framework agreement from Norway, Finland and Belgium totalling $33m for delivery across 2021 and 2022. The addition was already in our expectations but provides further underpinning of the anticipated recovery in international sales of respiratory systems. Across the announcements, management confirms that trading year to date has been in line with expectations, with good order intake. It now expects lower armour revenue for FY21 (c $50m) resulting from the delays in ramping up deliveries through the rest of the year. All other expectations remain unchanged, as do FY22 estimates.
Valuation: Still growing to assumed FY22 levels
Management has done a good job of building investor confidence as it transitioned to a more focused play in defence and security markets. However, the rating was pricing in execution with too low a risk. While the cash impact over FY21 and FY22 only equates to 34p per share, it will take management time to fully recover investor confidence and the rating. Avon continues to grow strongly, even in FY21.
Revisions to estimates
We have reduced our revenue expectation for Avon Protection by $50m or 17% in FY21 to reflect the delay in the body armour contract ramp-ups. While we cannot be certain about the success of retaining the IHPS contract, we are assuming that FY22 revenues are unchanged as a result of some catch-up of FY21 deferred supply. It is entirely plausible that the protest will not be successful. The drop through to EBITDA leads to a reduction in FY21e PBT and EPS of 19%.
There is a slight reduction in expected cash flow, which slightly increases net interest payable in FY22, reducing PBT and EPS marginally.
Exhibit 1: Avon Rubber earnings estimates revisions
Year to September ($m) |
2021e |
2022e |
||||
|
Prior |
New |
% change |
Prior |
New |
% change |
Revenues |
||||||
Avon Protection |
292.9 |
242.9 |
-17.1% |
314.8 |
314.8 |
0.0% |
Team Wendy |
0.0 |
0.0 |
|
47.3 |
47.3 |
|
Total Revenues |
334.9 |
284.9 |
-14.9% |
362.0 |
362.0 |
0.0% |
|
|
|
|
|
|
|
EBITDA |
84.1 |
71.5 |
-14.9% |
93.6 |
93.6 |
0.0% |
Adjusted EBIT |
|
|
|
|
|
|
Avon Protection |
54.8 |
42.8 |
-21.8% |
61.8 |
61.8 |
0.0% |
Team Wendy |
10.5 |
10.5 |
|
11.8 |
11.8 |
|
Adjusted EBIT |
65.3 |
53.3 |
-18.3% |
73.6 |
73.6 |
0.0% |
|
|
|
|
|
|
|
Adjusted PBT |
62.2 |
50.2 |
-19.3% |
69.5 |
69.4 |
-0.2% |
|
|
|
|
|
|
|
EPS - adjusted fully diluted (c) |
162.2 |
130.9 |
-19.3% |
181.4 |
181.1 |
-0.2% |
DPS (c) |
44.9 |
44.9 |
0.0% |
53.9 |
53.9 |
0.0% |
Net debt/(cash) |
(59.3) |
(55.4) |
-6.4% |
(85.1) |
(74.5) |
-12.3% |
Source: Edison Investment Research estimates
Exhibit 2: Financial summary
$m |
2019 |
2020 |
2021e |
2022e |
||
Year end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
162.0 |
213.6 |
284.9 |
362.0 |
Cost of Sales |
(98.5) |
(127.2) |
(174.4) |
(221.6) |
||
Gross Profit |
63.5 |
86.4 |
110.5 |
140.4 |
||
EBITDA |
|
|
36.2 |
49.0 |
71.5 |
93.6 |
Operating Profit (before amort. and except.) |
|
|
33.0 |
42.5 |
60.5 |
81.5 |
Intangible Amortisation |
(4.2) |
(4.0) |
(7.2) |
(7.8) |
||
Operating profit (company definition) |
28.8 |
38.5 |
53.3 |
73.6 |
||
Exceptionals |
(17.2) |
(35.3) |
(8.9) |
(8.9) |
||
Other |
(0.6) |
(0.1) |
(2.2) |
(2.2) |
||
Operating Profit |
11.0 |
3.1 |
42.2 |
62.5 |
||
Net Interest |
0.1 |
(2.4) |
(0.9) |
(2.0) |
||
Profit Before Tax (norm) |
|
|
28.3 |
36.0 |
50.2 |
69.4 |
Profit Before Tax (FRS 3) |
|
|
11.1 |
0.6 |
41.2 |
60.5 |
Tax |
1.9 |
1.4 |
(7.8) |
(11.5) |
||
Profit After Tax (norm) |
26.1 |
29.9 |
40.6 |
56.2 |
||
Profit After Tax (FRS 3) |
13.0 |
2.0 |
26.2 |
38.4 |
||
Average Number of Shares Outstanding (m) |
30.5 |
30.6 |
30.6 |
30.6 |
||
EPS - normalised (c) |
|
|
85.6 |
97.6 |
132.7 |
183.6 |
EPS - normalised & fully diluted (c) |
|
|
84.9 |
96.2 |
130.9 |
181.1 |
EPS - (IFRS) (c) |
|
|
42.7 |
6.7 |
109.1 |
160.0 |
Dividend per share (c) |
26.6 |
34.5 |
44.9 |
53.9 |
||
Gross Margin (%) |
38.8 |
40.4 |
38.8 |
38.8 |
||
EBITDA Margin (%) |
22.1 |
22.9 |
25.1 |
25.8 |
||
Operating Margin (before GW and except.) (%) |
20.2 |
19.8 |
21.2 |
22.5 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
81.2 |
155.3 |
255.8 |
253.5 |
Intangible Assets |
43.5 |
89.4 |
124.6 |
125.7 |
||
Tangible Assets |
28.2 |
40.1 |
67.7 |
66.7 |
||
Right of Use Asset |
9.5 |
25.8 |
29.3 |
26.5 |
||
Investments |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Assets |
|
|
147.1 |
299.3 |
335.5 |
401.7 |
Stocks |
25.5 |
36.3 |
48.8 |
62.7 |
||
Debtors |
43.6 |
46.0 |
61.2 |
77.8 |
||
Cash |
59.6 |
187.3 |
59.3 |
85.0 |
||
Other |
18.4 |
29.7 |
29.7 |
29.7 |
||
Current Liabilities |
|
|
(43.6) |
(98.2) |
(213.1) |
(248.8) |
Creditors |
(43.5) |
(58.7) |
(72.8) |
(92.0) |
||
Short term borrowings |
(0.1) |
(39.5) |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(92.0) |
(126.9) |
(130.2) |
(127.1) |
Long term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
||
Lease Liabilities |
(15.9) |
(29.0) |
(32.6) |
(29.8) |
||
Other long-term liabilities |
(76.1) |
(97.8) |
(97.6) |
(97.3) |
||
Net Assets |
|
|
92.6 |
229.5 |
248.0 |
279.2 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
8.8 |
(3.4) |
82.3 |
75.1 |
Net Interest |
0.0 |
(2.4) |
(0.9) |
(2.0) |
||
Tax |
1.9 |
1.4 |
(7.8) |
(11.5) |
||
Capex |
(7.3) |
(19.9) |
(18.6) |
(17.4) |
||
Acquisitions/disposals |
0.0 |
118.8 |
(134.4) |
(9.2) |
||
Financing |
(1.7) |
0.0 |
(1.3) |
(1.3) |
||
Dividends |
(6.9) |
(8.9) |
(11.6) |
(14.7) |
||
Other |
7.3 |
2.7 |
0.0 |
0.0 |
||
Net Cash Flow |
2.2 |
88.3 |
(92.4) |
19.1 |
||
Opening net debt/(cash) |
|
|
(57.3) |
(59.5) |
(147.8) |
(55.4) |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
(59.5) |
(147.8) |
(55.4) |
(74.5) |
Total net financial liabilities/(assets) |
|
|
(43.6) |
(118.7) |
(22.8) |
(44.7) |
Source: Company reports, Edison Investment Research
|
|
Research: TMT
Adding to Keywords’ US$50m acquisition of High Voltage Software earlier in the week, it has announced a further two smaller acquisitions: Indigo Pearl, a UK PR agency specialising in the video games sector, and Jinglebell, a Milan-based studio that provides audio recording, music production and sound design for video games and advertising. Keywords is to pay up to £2m for Indigo Pearl, 1.1x FY20e revenues and 7.1x FY20e adjusted EBITDA, and up to €1.8m for Jinglebell, equating to 0.9x FY20e revenues and c 18x FY20e EBITDA. This takes Keywords’ tally to seven M&A deals this year, with six in H220. With substantial net cash and €100m of undrawn facilities, we see no reason for the company’s deal making to slow in FY21.